Improving Your Credit Score

It’s All About Credit-bility

Want to get a better interest rate on your home mortgage? A better deal on a car? A better job?

Believe it or not, having a good credit score can impact many facets of your life. Employers often check the credit rating of prospective employees. For many employers, a solid credit rating reflects positively on your ability to manage your job responsibly.

A good credit rating also tells prospective landlords that you are a person who is more likely to pay the rent on time. And likewise, banks look more favorably if you have a good credit history. Good credit is important to secure financing when buying furniture, a computer, a car and especially, when buying a home.

Unfortunately, most people don’t even know what their credit score is. Creditors are not required to tell you what your score is, and it doesn’t normally show up on your credit report. But there are steps you can take to improve your creditworthiness, nonetheless.

First, a quick lesson in how a person’s credit score is determined. Most lenders use a FICO score — a numeric calculation by Fair Isaac Corporation — to determine an objective measure of your credit risk. Scores range from 300 to a perfect 850 with the average around 700. The higher the score, the better the deal one can receive from lenders — in particular, lower interest rates, fewer points and less fees — all benefits of being less of a risk to the banks and their investors.

Five Basic Factors Determine Your Credit Score.

1. Your payment history. (this attributes to approximately 35 percent of your score)
The most significant impact on your score Paying your bills on time.

2. Amounts that you owe (30 percent)
Part of the science of credit scoring is determining how much debt is too much. It’s a fine line. While you don’t want to have too many accounts open, it’s good to have more than one, so that you’re not using too much of one account’s available credit limit.

In some cases, having a very small balance without missing payments shows you’ve managed credit responsibly, and may be slightly better than having no balance. Owing a lot of money on numerous accounts suggests to lenders that you may be overextended and therefore, may be more likely to make late payments.

3. Length of your credit history (15 percent)
Lenders want to see that you can responsibly manage your credit accounts over time.

4. Getting new credit (10 percent)
Opening new accounts responsibly and paying them off on time will raise your score in the long run. As long as you don’t go overboard.

5. Manage a healthy mix of types of credit (10 percent)
Your FICO score will reflect your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans, etc., she explains. While a healthy mix will improve your score, it is not necessary to have one of each and it’s not a good idea to open accounts you don’t intend to use.

Lenders look at many things when making a credit decision, including your income, employment history, and the kind of credit you’re requesting. But, surprisingly, none of these factors are included in your FICOscore.

Low Credit Scores

What to do if your credit score is low? Reduce your outstanding debt. Start with credit card debt, which is deemed the worst kind of debt for two reasons — the high interest rate you pay on what you owe and the ease with which they are used.

If there is too much credit card debt, one needs to reduce the number of debts and the amount of debt in that order. This may mean paying off the credit cards with the lower balances and cancelling the cards. Keep only one or two. Or it means consolidate credit card balances to one or two cards, cancel the no-balance extra cards and begin to payoff the balance by paying more than the minimum payment to reduce the principal.

Most importantly, try and refrain from so freely using credit cards — if you’re trying to improve your rating, don’t buy it if you can’t pay cash.

The best way to repair a low credit score is to pay back debts and stop spending on items you cannot afford to pay back within a couple of months. For more information on improving your score, talk with your Prudential Locations Realtor.